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Proper construction of section 44 of the Income-tax Act regarding liability in case of a discontinued firm or association. Detailed Analysis: The judgment delivered by the High Court of Bombay involved a question concerning the interpretation of section 44 of the Income-tax Act. The case revolved around a partnership firm, E. Loeffler & Co., which was dissolved, and one of the partners, Iyer, continued the business under a new entity. The Income-tax Officer sought to hold the petitioner, a former partner, liable for the tax arrears of Iyer under section 44. The petitioner challenged this liability, arguing that the business was not discontinued as it was carried on by Iyer, the successor. The court analyzed the language of section 44, emphasizing that it refers to the discontinuance of the business of the firm, not the firm itself. The court highlighted that a new firm coming into existence does not trigger section 44 if the business of the old firm continues without discontinuation. The judges stressed that the marginal note of the section cannot control its clear language and that any vicarious liability imposed by a taxing statute must be strictly construed in favor of the assessee. Furthermore, the court referred to legal precedents to support its interpretation. It cited the Privy Council's decision in Commissioner of Income-tax v. P.E. Polson, which clarified the distinction between discontinuance and succession in taxing law. The court also mentioned a judgment of the Madras High Court and the Patna High Court, which further highlighted the importance of differentiating between discontinuance and succession in tax assessments. The court examined the scheme of the Income-tax Act, pointing out that section 26(2) deals with cases of succession, while section 44 specifically addresses situations of discontinuance. The court explained the provisions related to liability in cases of succession and change in the constitution of a firm, emphasizing that section 44 applies only when there is a genuine discontinuance of the business. Ultimately, the court ruled in favor of the petitioner, holding that since the facts did not align with the requirements of section 44, the Income-tax Officer could not impose liability on the petitioner for the tax arrears of Iyer. The judgment concluded by allowing the petition, making the rule absolute, and ordering the Income-tax Officer to act in accordance with the petitioner's prayer. The respondents were directed to pay the costs of the petition.
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